This content is provided by the Americans for Tax Reform Foundation.

Current Law

Flexible Savings Accounts (FSAs) are tax-privileged accounts available to employees through an employer “cafeteria” health plan. Employees agree to make a fixed annual contribution to the account which will be deducted from their pre-tax salary. This exempts the contribution from income and payroll taxes. That money can then be used to pay for “qualified medical expenses” incurred by the account holder, his or her spouse, and any other dependents under the age of 27. The contribution amount is currently unlimited, but money left in the account is forfeited every calendar year under the so-called “use it or lose it” provision.

Scheduled Changes

Obamacare will impose a $2,500 cap on FSA contributions effective January 1, 2013. The cap will be indexed to inflation every year after 2013.

ATRF Analysis

Voluntary, account-based plans like the FSA are utilized by 35 million Americans, and are a multi-billion dollar a year cash cow. Not surprisingly, the government is trying to milk it for tax revenue by imposing a contribution cap.

The $2,500 cap on FSA contributions will increase the tax burden on participants who spend more than the cap amount on qualified medical expenses. Every dollar over the cap amount will be subject to both state and federal taxes.

This tax will not affect the average FSA participant, whose yearly contribution ($1,386 in 2008) is shy of the contribution cap. It will instead hurt the most vulnerable participants: those with extremely high medical expenses.

FSAs are most useful for individuals who have chronic conditions that require regular, costly support and treatment — common beneficiaries include diabetics and families with special needs children. The participants most likely to pay this tax, then, will be those with the highest medical burdens. This tax is made even more intolerable when one considers the average income of FSA participants: a solidly middle-class $55,000 in 2008.

Although the FSA cap is indexed to inflation after 2013, it will envelop more participants as time goes on. Insurance premium growth and health care costs consistently outpace inflation by two or three orders of magnitude. This disparity will widen in 2014, as Obamacare is projected to increase premium costs by 7.4% while inflation is expected to remain constant at about 2%. This means that the FSA contribution cap will not rise apace health care costs, ensuring that more participants will have to pay the tax if they want to maintain the same level of care.

The FSA cap is a revenue raising tactic that will hit the wallets of Americans with serious medical needs. It is unacceptable for it to be paraded as a component of “healthcare reform.”

10-Year Cost to Taxpayers

Joint Committee on Taxation: $13 billion

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